Rosy Ending Q3 Part 1 : Chasing Performance, Trading Positioning

Did we have a crisis this quarter ? Some of the numbers are pretty shocking with the outflows, whilst small in the context of the inflows over the past 5 years, creating immediate havoc for the economically vulnerable countries of EM.

At the peak of the outflows, EM stocks lost over 1 trillion in value late August, which is only a fraction of bond losses. Yet we have turned that corner and put that ugly episode behind us as we head into month and quarter end, the inflows are coming back in force.

The world is back to a rosy place today and I have a new bloom in the garden after this morning’s storm.

We still have a huge cashpile floating around in the world as most clients stick to cash in these volatile times which is leading to a headache of a month/quarter end next Monday.

Flows have been strong into equities with the S&P 500 at historic high after the FED backed down on the 18th.

Where are the markets positioned for the quarter end ?

We only have 4 days left to make the much needed budgets that have been eluding many a trader/hedge fund for their Q3 close to save their precious bonuses and make targets before fund redemptions set in next month.

I pulled out the position reports available and this is what I managed to get as of last week before the FOMC.

Massive shorts in the 10Y UST vs massive longs in the S&P 500.

Big longs in the USDJPY vs massive longs in the EURUSD.

AUDUSD going to neutral as shorts scaled back and people are getting tired of Gold.

I have a feeling this is going to be a very unfriendly month end as the chase for performance begins. Traders will go creating alot of volatility to cash in on.

So they are going to smash USDJPY down to 97.80 before pushing it back up to close the month above 100 because they know the that the sales tax hike announcement will come in the first week of October and the positioning on the street is long USDJPY.

AUDUSD will hit 0.9330 before rebounding to squeeze out the weak longs and the EUR will target 1.36.

US Treasuries will be heavily protected by the investment books and money will pour into equities to make up for their skepticism because the pain trade is still for a rally.

This will be a fun period and buys us time to consider the risks into Q4 to formulate a macro view and opportunities to pick bottoms in the mayhem.